Bank of America has put a number on what the US government’s addiction to short-term borrowing actually costs when rates go up: roughly $50 billion in additional annual interest payments on outstanding Treasury bills.
T-bills mature quickly, often in weeks or months, which means the Treasury is constantly rolling them over at whatever rate the market demands. When the Fed raises rates, those costs reprice almost immediately, unlike longer-duration bonds that lock in yesterday’s lower yields for years.
The refinancing treadmill
T-bills account for over 20% of the total US debt portfolio, according to BofA’s analysis. The Treasury has been issuing roughly $500 billion in T-bills on a weekly basis.
Every time a batch of T-bills matures, the Treasury has to reissue at current market rates. In a rising-rate environment, each refinancing cycle gets incrementally more expensive.
The $50 billion figure BofA cites represents the incremental annual cost that materializes when the Fed tightens policy. It’s not a one-time hit. It’s a recurring charge that compounds with every additional hike.
Three hikes on the horizon
BofA’s strategists are forecasting three 25-basis-point increases in the federal funds rate between September and December, which would push the target range to 4.25% to 4.50%. The bank points to persistent inflation and a resilient labor market as the driving forces behind the anticipated tightening.
Each of those quarter-point moves ripples through the T-bill market almost immediately. Unlike 10-year or 30-year bonds, which take time to reflect new rate realities, T-bill yields adjust within days of a Fed decision.
The trillion-dollar interest problem
Federal net interest payments are projected to exceed $1 trillion in fiscal 2026, which would represent a record share of both total government outlays and revenue.
The US national debt is forecast to reach somewhere in the range of $38 trillion to $40 trillion.
Previous Federal Reserve operations had supported the front end of the curve through T-bill purchases for reserve management purposes, with BofA noting volumes around $40 billion per month in prior years.